Aware, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013. Financial amounts below are in millions of dollars unless otherwise noted. Aware’s active businesses are biometrics and imaging software and services, and DSL service assurance software and services; it also receives legacy DSL royalties.
Key financial results and liquidity
| Metric | Q1 2013 | Q1 2012 |
|---|---|---|
| Revenue | $5.616 | $4.904 |
| Operating income before patent-arrangement income | $2.012 | $1.048 |
| Patent-arrangement income | $0.780 | — |
| Income from continuing operations | $1.857 | $1.124 |
| Net income | $1.857 | $1.118 |
| Diluted earnings per share | $0.08 | $0.05 |
| Cash provided by operating activities | $0.645 | $1.339 |
- Revenue increased 15% year over year. Software license revenue rose 34% to $3.808; maintenance rose 18% to $1.041. Services fell 31% to $0.476, and royalties fell 41% to $0.291.
- Biometrics and imaging segment revenue was $4.688, up from $3.670; DSL Service Assurance revenue was $0.637, down from $0.743. The remaining $0.291 was reported as corporate revenue.
- At March 31, cash and cash equivalents were $72.507, versus $71.074 at December 31, 2012. Current assets were $79.594 and current liabilities $3.480. The balance sheet lists no debt.
- Operating cash flow was below net income, chiefly reflecting a $1.592 increase in accounts receivable. Financing provided $0.858, including $0.838 of excess tax benefits from stock-based compensation; capital expenditures were $0.070.
- Income tax expense was $1.017, compared with $0.002 a year earlier. Q1 2012 tax expense had been offset by a valuation-allowance reversal. The 2013 tax benefits from excess stock-option deductions were recorded in equity, not as a reduction of tax expense.
Changes, outlook and other matters
- Improved biometrics and imaging software sales, lower G&A expense and $0.780 of patent-arrangement income drove higher earnings. The patent income arose from a royalty statement and was recorded as a receivable; future proceeds are uncertain.
- Management attributed stronger license sales to a large U.S. government sale, higher international sales and OEM demand. Services revenue declined partly because a government contract phase concluded in February; a follow-on contract was awarded later that month, but contributed insignificant Q1 service revenue.
- Management expects legacy DSL royalties to continue declining after a licensee reached contractual sales thresholds that reduced or eliminated royalties on certain products. A legacy DSL customer also ceased receiving engineering support, and Aware does not expect further service revenue from it.
- An April 2, 2013 unrestricted stock award of 130,000 shares is expected to generate $0.6 of compensation expense over the remaining 2013 quarters, approximately $0.170 per quarter. Management also expected patent-related legal and other expenses to be lower in 2013 than in 2012.
- No formal revenue or earnings guidance was provided. Management believed available cash would fund operations for at least 12 months, while noting that additional financing might be needed and might not be available.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. It reported no material change to the risk factors in the 2012 Form 10-K and no litigation it believed likely to seriously harm the business.
Important facts for investors to verify
- Whether the Q1 license-sales strength, including the large government sale and OEM demand, continues in later periods.
- The timing and collectability of the $0.780 patent-arrangement receivable and whether the arrangement yields further income.
- The pace of decline in DSL royalties and the outlook for services revenue following contract and customer changes.
- The effect of the April stock award and the higher tax expense on subsequent-period earnings and cash flows.
- The filing’s stated cash-flow comparison: Q1 2013 operating cash flow was $0.645 versus $1.339 in Q1 2012; review the full statements and working-capital movements when assessing cash generation.